Final answer:
Silicon Valley Bank failed due to interest rate risk that devalued its bond investments and a liquidity crisis caused by mass withdrawals, creating an unsustainable asset-liability mismatch exacerbated by the dilemma of whether to increase interest rates for depositors.
Step-by-step explanation:
Silicon Valley Bank failed primarily due to interest rate risk and liquidity risk. The bank had invested heavily in long-term assets such as bonds, which are repaid over many years. However, when interest rates rose, these bonds lost value, making it difficult for the bank to sell them without incurring losses. This situation was exacerbated by the fact that customers started withdrawing their deposits en masse amid concerns about the bank's stability.
As a result of these withdrawals, Silicon Valley Bank faced a classic asset-liability mismatch: the bank's short-term liabilities (customer deposits that could be withdrawn at any time) vastly outweighed its ability to quickly liquidate long-term assets at their original value. Consequently, the bank couldn't raise the interest rates it paid to depositors without risking paying more in interest than it was earning from its older loans, which had been made at lower interest rates. Failing to raise rates, on the other hand, meant losing customers to banks offering higher rates due to the prevailing economic climate.
The failure of such an institution sent shockwaves through the banking sector and demonstrated the potential dangers of a bank inadequately managing its interest rate and liquidity risks. This resulted in a significant impact on both the US and the global economy, as banking stability is crucial to economic confidence and growth.